Deeds in Lieu of Foreclosure: Is It Time to Dust Off Our Skills?

April 7, 2017

National | Thought Leaders Commentary Deeds In Lieu Of Foreclosure: Is It Time To Dust Off Our Skills? SAN FRANCISCO—Deeds in lieu can have benefits for both borrowers and lenders, including the ability to control expenses, writes Allen Matkins’ Stephen P. Lieske in this EXCLUSIVE commentary.

By Stephen P. Lieske SAN FRANCISCO—Regardless of where you think we are in the current economic cycle, it may be time to refresh our recollection with respect to secured lending remedies and alternatives. A useful tool is the deed in lieu of foreclosure, which is completely described by its name: the defaulting borrower acknowledges that it is game over, and transfers the property to the lender instead of forcing the lender to Stephen P. Lieske foreclose. Although it sounds defeatist, deeds Documenting the Deal. A deed in lieu deal in lieu have benefits for both borrowers and is usually documented with a Deed in Lieu of lenders. Foreclosure Agreement (“DIL Agreement”), Why do a deed in lieu of foreclosure? Expense. which looks like a purchase and sale agreement, Because the process is consensual, both parties and makes the form of the transaction essentially can control expenses. Reputation. Unless the a purchase deal. borrower is getting out of the real estate business, Estoppel. The borrower acknowledges that cooperating with the lender will give them a the loan is in default, that the property is better story to tell when the good times return. underwater and that there is no coercion to Borrowers also avoid bad publicity associated with enter into the DIL Agreement. This provides a foreclosure. the lender with an estoppel argument if the April 7, 2017

borrower tries to change its mind after the deal on itself, the DIL Agreement should contain a has closed. consent to foreclosure. Similarly, to protect against Due Diligence. Although the lender presumably the contingency that the borrower subsequently has a solid loan origination file, the lender must files for bankruptcy protection, the Agreement treat the transaction as an acquisition and, should include a prospective grant of relief from accordingly, update its due diligence with respect the automatic stay. The effectiveness of these to title, survey, property condition, leases and provisions is questionable, but the prudent lender environmental issues. should insist on them nonetheless. Releases. Typically, both parties release each other Other Observations. Obviously, the ability of from future liability and sign a mutual covenant not the parties to obtain other concessions (e.g., cash to sue. For borrowers, this is especially important payments) depends on bargaining power. In other where the borrower owns other assets and/or the words, who wants it more. The loan-to-own lender loan has been guaranteed. Lenders do not, however, who bought the loan from the originating lender release borrower parties from liability with respect with a view to acquiring the property may be more to environmental issues. On the other side of the willing to grant concessions to obtain the property table, if the lender’s behavior has not been perfect, quickly. Similarly, the borrower who is in desperate a release from the borrower group is handy. straits may want to hand the lender the keys as Title Insurance. The title insurance policy that quickly as possible to get the release. insures the security instrument will likely continue, Although we all hope that the good times but will not provide true owner’s title coverage. continue, the time is now to sharpen the skills Accordingly, the lender should purchase an owner’s that may be needed when the real estate economy policy of title insurance. A further standard practice takes a tumble. is for the lender to keep its lien in place and obtain a non-merger endorsement to the lender’s policy. Stephen P. Lieske, whose legal practice focuses on In other words, if a title issue arises, the lender real estate finance and capital markets, is a partner would retain the option of foreclosing on itself. in the San Francisco office of Allen Matkins. He may Consent to Foreclosure and Bankruptcy. be contacted at [email protected]. The views Because the lender will retain the right to foreclose expressed here are the author’s own.

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